In the recent case, Amis v. Greenberg Traurig, et al. (2015) __Cal.App.4th__, the California Court of Appeal for the Second District acknowledged the California Supreme Court's prohibition against judicially crafted exceptions to the mediation confidentiality statutes. The Court of Appeal held that the plaintiff in a malpractice action could not prove that any act or omission by his attorneys caused him to sign a settlement agreement and suffer alleged injuries, because all communications with his attorneys regarding the agreement occurred in the context of mediation.

John Amis (Amis) and his company retained the law firm Greenberg Traurig (GT) to represent him and his company in litigation. The case settled at mediation. The resulting settlement agreement was secured by a stipulated judgment by Amis's company for $2.4 million, with a payment plan. His company defaulted on the payments, and judgment was entered against Amis and his company for the $2.4 million. Amis brought a legal malpractice action against GT, based in part upon the allegation that GT failed to advise him that the settlement agreement and stipulated judgment converted the corporate obligations of his company into Amis's personal obligations.

The trial court granted GT's summary judgment motion. The court agreed that Amis could not establish an essential element of his claims, because it was undisputed that any act or omission by GT that purportedly caused Amis to execute the settlement agreement occurred during the mediation. The court also refused to entertain an inference that GT caused Amis to execute the settlement agreement during mediation, because the mediation confidentiality statutes effectively barred GT from defending itself against such an inference.

Negotiators are typically advised to come to the bargaining table with an alternative offer in their back pocket. Viable alternatives, even weak ones, are thought to provide negotiators with more power to leverage better deals. However, new research from an international team of psychological scientists suggests that having no power (no alternatives) can sometimes be an advantage.

Experienced negotiators consider whether they (and the other side) have an alternative deal called a best alternative to a negotiated agreement, or BATNA. In litigated cases, the stronger BATNA usually rests with the party more likely to prevail at trial. A strong BATNA gives one a viable backup plan, and the ability to wield more power in negotiations. Negotiators with alternatives have higher aspirations, make larger initial demands, and claim more value.

But research conducted by Michael Schaerer and Roderick I. Swaab of INSEAD and Adam D. Galinsky of the Columbia Business School showed that someone with no alternatives (no power) can secure better outcomes than someone having a weak alternative (little power), because weak alternatives serve as cognitive anchors that predispose us to accept lower offers. Negotiators with no alternative (no power) do not feel anchored by a weak BATNA, and are liberated to make higher offers.

The dispute settled for an agreed sum. Defendant offers to make payments under an installment plan. Plaintiff insists that the agreed sum be paid by a specified date, but if defendant defaults, a larger sum will be due as a stipulated judgment. Plaintiff hopes this will incentivize defendant to make all payments. One problem in this scenario is that California courts have deemed such deals for a larger sum as an unenforceable "penalty and forfeiture" because the sum bears "no reasonable relationship" to actual damages suffered as a result of delay.*

However, the parties in Jade Fashion & Co., Inc. v. Harkham Industries, Inc. (2014) 229 Cal.App.4th 635, made a similar deal that the court enforced. Harkham purchased $341,000 in goods, but got behind on its payments. Jade agreed to allow Harkham to pay off the debt in three months with weekly payments until the entire balance was paid in full. Jade further agreed that if Harkham made each payment on time, $17,500 would be deducted from the final payment. Time was of the essence.

Imagine you own a business that created three million copies of marketing materials to promote a new mail campaign. At the last minute, your legal department gives you bad news: You have not cleared the rights for the main photograph to be used in the materials, and the owner of the photography studio could charge up to $3.0 million to grant the rights. It looks like the studio holds all the cards. What negotiation strategy could you use to turn this around in your favor?

Harvard Business School professors David A. Lax and James K. Sebenius offer a real-life solution taken from history. In 1912, Theodore Roosevelt's presidential campaign used a photograph of the candidate on three million pamphlets to be distributed during an upcoming tour. Campaign workers later discovered that they did not secure the rights to reproduce the picture from the photography studio that owned them. Using the pamphlets without permission could bring an expensive lawsuit and tarnish the candidate. If they tried to negotiate the rights, the studio could demand up to $3.0 million.

What happens in mediation stays in mediation, right? Yes, according to Evidence Code section 1119 and the California Supreme Court. However, a United States District Judge recently held that mediation statements were admissible at trial to allow an insurance company to present a defense to a bad faith claim. (Milhouse v. Travelers Commercial Ins. Co. (C.D.Cal. 2013) 982 F.Supp.2d 1088.)

Background: Homeowners lost their entire home in a tragic wildfire. Attempts to settle the claim at mediation were unsuccessful. A two-week trial followed, where the homeowners argued that Travelers' "unreasonable refusal to settle the claim was bad faith." Both sides presented evidence of statements made before, during, and after the mediation.

Travelers initially thought they were only $500,000 apart, and offered a "couple hundred thousand dollars" to settle the claim. However, at the mediation, the homeowners made a $7.0 million demand and asked for nearly $1.0 million of attorney's fees, though their attorney had only worked on the case for a few weeks. Homeowners later insisted that Travelers commit to paying in a range between $1 million and $5 million. Following the mediation, and throughout the trial, the parties remained several millions of dollars apart.

The jury found no bad faith, determining that homeowners had contributed to delay in the adjustment process. It awarded damages for breach of contract, which the court reduced to less than $1.1 million. Post-trial, homeowners sought a new trial for bad faith, and argued that California's mediation privilege barred admission of the mediation statements.

The court disagreed, finding that homeowners had waived their right to claim any privilege. The court also found that the jury needed to hear all about what happened during and after the mediation so it could determine whether Travelers did in fact act unreasonably, maliciously, fraudulently, or oppressively by refusing to settle the claim. "To exclude this crucial evidence would have denied Travelers' due process right to present a defense." The court concluded that "[i]t was not Travelers who acted unreasonably in settling the claim. Sadly, it was the [homeowners]. They demanded way too much money to settle their claim."

Critique: The ruling is counter to mediation confidentiality statutes and case law. This was a diversity action, so under Federal Rule of Evidence 501, "state law governs privilege." California's mediation privilege, California Evidence Code section 1119, subdivision (a) states that "No evidence of anything said or any admission made for the purpose of, in the course of, or pursuant to, a mediation . . . is admissible . . . in any . . . civil action." The California Supreme Court, starting with Foxgate Homeowners' Association, Inc. v. Bramalea California, Inc. (2001) 26 Cal.4th 1, to Cassel v. Superior Court (2011) 51 Cal.4th 113, has clearly stated that there are no exceptions to that rule.